2013-09-17

Reforming China's monetary system

Shadow banking as well as the prevalence of ‘illegal fundraising’ in China reflects the severe deficiency of its monetary policy and management system. Given the role of money and credits in the economy, reforming the banking and finance system and its monetary management system in China should be a top priority.
From monetary policy point of view, a number of areas should be reformed. Firstly, monetary authority should not control both deposit and lending rates and should adopt the general practice of most central banks in the industralised countries.
Secondly, neither the government nor the central bank should force any banks to lend state owned entities at lower than the market rates to distort the banking system and monetary policy. This not will create a fair competition between the SOEs and other entities in the market place but also reduce the risks for banks.
Thirdly, China needs to transform the shadow banking into the formal banking and finance system and allow more entries of the private sector into the banking and finance system if they can meet regulation requirement.
Once the previous step is taken, it should strengthen its management of the banking and finance sector.

Reforming its banking and finance system will also have the added benefits of reducing corruption and organised crimes such as money laundering.
A better functioning banking system in China will also reduce the need for the Chinese people to physically store and carry a lot of cash.
The most important benefit is to allow much more efficient allocation of economic resources.